Mock negotiations of today’s most contentious
M&A elements

Acquisitions of venture-backed US companies are typically
structured as reverse triangular mergers, where the buyer
creates a new, wholly-owned subsidiary that disappears into the
target on closing date;

Buyers strive to include catch-all representations and
warranties such as full disclosure and no undisclosed
liabilities representation;

Strategic acquirers of venture-backed companies in the US
typically rely on post-closing indemnification rights to get
compensation for inaccurate reps and warranties in the merger
agreement;

Some buyers prefer using indemnification escrows over reps
and warranty insurance due to potentially important exclusions
in coverage;

M&A deal point studies are increasing but many have
skewed survey samples;

The US’ Securities Exchange Act’s
Rule 10b-5/full disclosure representation, materiality standard
in the accuracy of representations closing condition, and
exclusion for consequential damages are all common points for
negotiation between buyers and sellers.

Escrow in the M&A structure

Uncertainty from Cfius and the approvals processes on the
China side are both drawing more interest in escrows in
US/China deals;

In southeast Asia, antitrust risk and challenging local
regulatory approvals, especially in financial services deals,
are also adding challenges;

The PRC tax rule (circular seven) is prompting use of tax
escrow to satisfy regulatory requirement;

Technology, private M&A and founder sale deals are
increasingly making use of escrow accounts;

Most commonly holdback escrows are for purchase price
adjustments and indemnity;

Use of multiple escrows across jurisdictions can help with
speed, flexibility and reliability.

How to succeed in energy and natural resources M&A

Don’t underestimate the potential for renewable
energy in Asia even though it is a burgeoning sector compared
to north America and Europe;

Financing is challenging for renewable energy because
scaling up small projects is time-consuming and due diligence
is expensive;

There is a lot of money going into renewable energy
globally, but it’s important to get commercial
structures right, build up packages and eliminate regulatory
disconnects;

India and Australia are seeing large transactions in
projects, especially in solar energy. Vietnam also shows huge
potential;

Use of reps and warranties insurance has exploded,
especially for private equity funds investing in energy;

Bidders are increasingly using insurance to make bids more
attractive.

China and ASEAN: at crossroads in trade and
investments

Most foreign direct investment (FDI) is running through
Singapore into Indonesia in ASEAN;

Wired and online middle class growing and companies such as
Alibaba and Tencent are increasingly interested in private
enterprises to expand in southeast Asia;

20% of FDI in Asia is within Asia, especially from China and
Japan, with private equity being a significant force;

Technology, consumer products and retail are all key sectors
of interest;

The Belt & Road Initiative is a key driver of Chinese
investment into the Philippines, with China targeting sectors
such as clean energy and infrastructure to meet basic
needs;

Impediments for FDI include new policies on foreign exchange
and ownership, and changes in administration.

Emerging markets

Financial due diligence is an issue for M&A deals in the
Philippines, especially private companies;

Litigation issues and lack of information in the diligence
process are key challenges in Indian transactions;

Indirect transfer taxes are not included in reps and
warranty insurance due to uncertainty;

Local advice for local jurisdictions is important in the
diligence process;

Sectoral guidelines, such as licence requirements, need to
be carefully looked at in countries such as India;

Reps and warranties insurance is increasing in emerging
market jurisdictions in Asia to aid clean exits;

Local protectionism mechanisms such as merger control
regulations are emerging in Asia, such as the Philippines, but
regulator still lacks the resources to handle approvals
efficiently.

Unsolicited/unwanted takeovers

2018 was a strong year for US hostile M&A volume due to
the availability of cash;

Hostile takeovers no longer carry the same stigma they used
to following the prevalence of institutional investors in US
companies, erosion of takeover defences and rise of proxy
advisory firms;

Hostile takeovers are less common in Hong Kong though as
many companies are family-owned and or built from scratch, plus
the lingering stigma of hostile takeovers in Asian culture;

The Securities and Futures Commission (SFC) in Hong Kong has
a goal to protect minorities and tends to be more comfortable
with global funds but less so with smaller ones, and will ask
more questions of private equity;

In Hong Kong, options for target that doesn’t
want to be taken over are: use the media to play down the value
of the company, hold the bidder to a no-increase statement on
price so it cannot be increased to push deal through after
it’s announced, and consider regulatory approvals
such as antitrust elements that are needed before the deal can
go through.